OREANDA-NEWS. Fitch Ratings has affirmed Qingdao City Construction Investment Group (QCCI) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB+' and Short-Term Foreign-Currency IDR at 'F2'. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
Links to Qingdao Municipality: QCCI's ratings are credit linked to, but not equalised with, those of Qingdao Municipality. Fitch's view is based on QCCI's 100% ownership by the municipality, which has strong oversight of the company's finances and operations; its strategic importance to the municipality; and the fiscal support it has received from the municipality. These factors result in a strong likelihood the municipal government would extend extraordinary support to QCCI, if needed. Therefore, QCCI is classified as a credit-linked public-sector entity under our criteria.

Important Platform: QCCI is the primary investment vehicle of Qingdao Municipality and plays an important role in implementing the municipal government's blueprint for urban planning and municipal construction. It plays a key role in assisting the municipality in its development of large city infrastructure projects and affordable social housing. QCCI is also the exclusive concessionaire for primary land development in several key areas.

Qingdao's Solid Creditworthiness: Qingdao ranked first in Shandong province and 11th among China's 36 major cities in terms of Gross Regional Product (GRP) in 2014. The municipality's GRP of CNY869.2bn accounted for 14.6% of Shandong province's GRP. Qingdao's economy is relatively well balanced between secondary (44.8%) and tertiary industries (51.2%) at end-2014. Qingdao Municipality has a solid budgetary performance, a diversified socio-economic profile and more fiscal flexibility than other cities in Shandong due to its status as one of the "cities specifically designated in the state plan", which grants it provincial-level economic management authority. The municipality's strengths are offset by its moderately volatile revenue from sales of land use rights, moderately high tax-supported municipal debt and contingent liabilities arising from municipal-owned entities.

Consistent Government Subsidies: Qingdao Municipality subsidised several of QCCI's public-service or municipal infrastructure projects, with the total subsidy amounting to CNY1.21bn in 2014, up from CNY448m in 2013. Fitch expects government subsidies to increase as QCCI takes on more municipal infrastructure projects at the request of the Qingdao government.

Tight Government Oversight: QCCI's major activities, such as urban development and primary land development, require approval from Qingdao Municipality. Its financing plan and indebtedness are also closely monitored by the municipality. QCCI is also required to report its operational and financial results to the municipality regularly. All of QCCI's major capital expenditures (amounts above CNY60m), investments (amounts above 10% of net assets), and funding plans need to be endorsed and approved by the municipal authorities.

Moderate Financial Profile: QCCI has had large capital expenditure, negative free cash flow and significant debt financing since 2012. Fitch believes this trend will continue, due to ongoing urbanisation and infrastructure improvement. QCCI's revenue and profit can be quite volatile as the company is exposed to the city's property market, a structural weakness of the company. Qingdao Municipality's support could mitigate this risk, to some extent.

RATING SENSIVITIES
An improvement in Fitch's view of Qingdao Municipality's credit quality and a commitment to stronger or more explicit support from the sponsor could trigger a positive rating action.

Significant weakening of QCCI's strategic importance to the municipality, dilution of the municipality's shareholding to below 75%, or reduced explicit and implicit municipality support may result in a downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the municipality, leading to deterioration in the sponsor's internally assessed creditworthiness.

The full list of rating actions is as follows:

Qingdao City Construction Investment Group
Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable
Long-Term Local Currency IDR affirmed at 'BBB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'

HongKong International (Qingdao) Company Limited
USD300m of 5.95% senior unsecured notes due 2025 affirmed at 'BBB+'
USD500m of 4.75% senior unsecured notes due 2020 affirmed at 'BBB+'.